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Why the free market is like quantum mechanics (and both are unrealistic constructs)

The views expressed are those of the author and are not necessarily those of Scientific American.


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Free market evangelists need to take a closer look at the fundamentals of their approach (Image: Gutter Magazine)

If we were omniscient and had infinitely fast and perfect computers, perhaps we could use quantum mechanics to explain chemistry, biology, economics and psychology. In reality, no amount of quantum mechanical theorizing can explain how molecular aggregates coalesce to give rise to self-replicating assemblies, let alone how these assemblies acquire the capacity for consciousness, introspection and purposeful action.

Now imagine someone who has started out with the honest and admirable goal of trying to apply quantum mechanics to understand the behavior of a “simple” biological system like a protein. He knows for a fact that quantum mechanics can account for (not explain) all of chemistry- the great physicist Paul Dirac himself said that. He has complete confidence that quantum mechanics is really the best way to get the most accurate estimates of thermodynamic free energy, solubility, molecular charges and a variety of other important chemical properties for his favorite protein.

But as our brave protagonist actually starts working out the equations, he starts struggling. After all the Schrodinger equation can be solved exactly only for the hydrogen atom. Even a simple protein constitutes a system that is infinitely more complex. The complexity forces our embattled savant to make cruel approximations at every stage. At some point, not only is he forced to commit the blasphemy of using classical mechanics for simulating the motion of the protein, but he also has to stoop to using empirical data for parameterizing many of his models. At one point he finds himself fighting against the Uncertainty Principle itself!

In the end our hero is chagrined. He started out with the lofty dream of using quantum mechanics to create an atomic-level description of his favorite protein. He ended up instead with a set of approximations, parameters from experiments, and classical mechanics-derived quantities which were required simply for explaining the features of the system. Prediction was not even an option at this point.

But his colleagues were delighted; long experience had taught them that in most cases the best you can hope for are useful models and not accurate theories. The patchwork model actually gave fairly useful answers. Like most models in chemistry, it had some explanatory and predictive value. Even though the model was imperfect and they did not completely understand why it worked, it worked well enough to spit out useful numbers. But this modest degree of success held no sway for our bright young scientist. He stubbornly insisted that if only we had an infinitely fast computer and an unlimited amount of time, quantum mechanics would no doubt have been spectacularly successful at predicting every property of his system with one hundred percent accuracy. Maybe next time he should just wait until he gets a perfectly accurate computer and has an infinite amount of time.

I state this parable to illustrate what I think is a rather unwarranted swathe of criticism that you occasionally hear from libertarians about the financial crisis during the last few years. The reasons for the financial crisis are many, probably more complex than the laws of quantum mechanics, and society will surely keep on debating them for years. But one of the most common reasons cited by libertarians (usually in the form of a complaint) for the failure of the economy is that we should not blame the free market for what happened because we didn’t actually have a free market. If only we had a chance to have a perfect free market (or at least freer than what it is), things would take care of themselves. Not surprisingly, this line of argument quickly leads to the case for less instead of more regulation.

Notwithstanding the fact that this argument inches uncomfortably close to arguments made by the most vocal proponents of socialism during the twentieth century (“There was nothing wrong with the system per se, only with the way it was implemented”), I think the argument is fundamentally misleading. Yes, maybe a perfect free market wouldn’t have led to the crisis, but that’s like our young chemist saying that infinitely accurate computers and approximation-free quantum mechanics would not have led to the kind of imperfect models that he ended up with. The problem is that there are so many obstacles in the application of quantum mechanics to a real-life chemical system that we are simply forced to abandon the dream of using it for describing and predicting such systems with speed and efficiency. Unless we come up with a practical prescription for how quantum mechanics is going to address all the obstacles in a real-world system without making approximations, it seems futile to argue that it can really take us to the nirvana of sixteen decimal places.

To me it seems that libertarians are ignoring similar obstacles in pursuit of their dream of a perfect free market. What are these obstacles? Most of them are actually well known: There’s imperfect competition because of the existence of inherent inequalities, leading to monopolies. There’s all that special interest lobbying, encouraged by politicians, which discourages true competition and allows monopolies to get a head start. There’s dispassionate cost/benefit analysis by corporations that often leads them to pollute the environment to their heart’s content. There’s information asymmetry, which simply keeps people from knowing all the facts.

But all these problems are really part of a great stumbling block- human nature itself. All the obstacles described above are basically the consequence of ingrained, rather unseemly human qualities- greed and the lust for power, the temptation to deceive, and a relentless focus on short-term goals at long-term expense. In reality, many obstacles in the way of a truly free market are put there not by zealous government regulators but by the inconvenient inequalities and stresses endemic in any complex system. I don’t see these qualities disappearing from our world anytime soon.

Now of course, I do agree that the free market was invented to curb some of the worst excesses of these inequities, and it has worked remarkably well in this regard. But the approach has limitations. Maybe libertarians need to understand that the last vestiges of the dark side of humanity can never be exorcised since they are an indelible part of what makes us human. So unless we come up with practical solutions to the problem of human nature itself – a difficult goal, to put it mildly – it’s rather futile to keep on chanting that all our problems would be solved if only we could somehow make these inherently human qualities disappear.

The final argument that libertarians usually make is this: Just because there are obstacles in the way of a goal that may seem insurmountable, it does not mean we should not even try to achieve perfection. Now that’s a perfectly laudable attitude, but the problem is that unless you come up with a practical solution for all the problems that you face on the way, your goal is just going to remain an abstract and unworkable ideal, not exactly the kind of solution that’s desirable in the practical arenas of politics and economics. Politics especially is the art of the possible, an endeavor where imperfect solutions which all sides can agree upon are far more preferable to abstract, idealized solutions on which it’s impossible to have consensus (just witness our current political gridlock). More importantly, sometimes a relentless drive toward one goal at the expense of everything else creates problems of other kinds; the science analogy in our previous example would be unimaginably expensive calculations, scientists laid-off because of the lack of results, overheating of the computers leading to fires etc. In case of economics we have all seen these problems.

Personally my main problem with “strong” libertarianism is that it often fails to consider the other aspects of the system, instead looking at every problem exclusively through the lens of lower taxes and greater market freedom, as if resolving these variables will take care of everything else. But that’s not the case. There’s the well-known problem of externalities and unintended consequences, there’s the problem of unregulated firms getting ‘too big to fail’ and there’s the persistent problem of growing income inequality; all these problems will still exist to varying extents in a libertarian’s perfect world because they are built into human nature and the workings of complex systems. Surely we have to admit that these are real issues too.

So what should libertarians do? Well, didn’t our intrepid quantum mechanic grudgingly accept the intervention of approximations and parameterization in his pursuit of the perfect theory of protein function? These approximations seemed ugly but he had to use them to circumvent the intrinsic limitations of quantum mechanics. Similarly, perhaps free marketers could realize that at least in some cases government intervention, no matter how ugly it may seem, may be the only way to reach a workable goal. It may not be the best of all worlds, but it could be the least of all evils. What would have happened if our bright young scientist had kept on insisting that he wouldn’t budge an inch if he were forced to use anything other than approximation-free quantum mechanics? He would have ended up with nothing. And in economics even more than in chemistry, a model that partly works is better than a model that does not exist. As Churchill put it, “Sometimes it’s not enough to do our best; we need to do what’s necessary”. It’s an adage that free marketers need to ponder.

This is a modified and updated version of a post I previously wrote on The Curious Wavefunction blog.

Ashutosh Jogalekar About the Author: Ashutosh (Ash) Jogalekar is a chemist interested in the history and philosophy of science. He considers science to be a seamless and all-encompassing part of the human experience. Follow on Twitter @curiouswavefn.

The views expressed are those of the author and are not necessarily those of Scientific American.





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  1. 1. John A. 5:28 pm 05/13/2013

    You have a good point overall, but what is the “model” you want to replace the market with? How will that prevent these crisis’s from happening? “Regulation would have prevented it” suffers from the same problem you outline in the model how would it have prevented it? There is considerable evidence that the financial crisis was caused by government-based manipulation of the market in order to lead to more low-income mortgages. Most proposed regulations would do nothing to prevent this in the future.

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  2. 2. Tim Maudlin 5:37 pm 05/13/2013

    Why would one ever think that a perfect free market would avoid financial problems? Bubbles (like the housing bubble or the dot.com bubble or even the old tulip bubble) are natural consequences of free markets: as the bubble forms, people make lots of money trading stocks or flipping condos or hoarding tulips. No one forces them to do this: as long as others see the money being made, they freely add to the bubble. It is a self-generating Ponzi scheme, and it eventually collapses. What is needed to avoid this is regulation, not free markets. To suggest otherwise without a shred of evidence is irresponsible.

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  3. 3. M Tucker 7:14 pm 05/13/2013

    “maybe a perfect free market wouldn’t have led to the crisis”

    The libertarian penchant for oversimplification is nothing more than an appeal to emotion instead of reason. So all those bad loans were because we had too much regulation? No down payment, no proof of income, no disclosure of debt burden. That was pretty close to no regulation and that is why we got into the mess. Now they want to stop any new bank regulations using the tired “perfect free market” line. Why, because government bailed out the banks so they see no real down side to doing it again.

    What about dropping regulations on steel imports? I wonder how the steel industry in the US feels about that. What about agricultural price supports? I wonder how the farming industry feels about that. But the banking sector, the financial sector, wants no oversight, no regulations, to carry on as before. I wonder why people are so gullible.

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  4. 4. John A. 7:24 pm 05/13/2013

    @Tim Maudlin, To mindlessly suggest that “regulation” would solve the problem of bubbles better than “free markets” is just as irresponsible. How does regulation stop a bubble? How does it distinguish “bubbles” from genuine productive enterprises? How does it distinguish the “bubble” of flipping condos, and prevent misallocation of capital into it, from a genuine need by the people for condos? One of the reasons the mortgage crisis happened was because there was a misallocation of capital into the housing market, which was encouraged by the government, who, though the proxy entities of Fannie and Freddie, bought a lot of these mortgages. The people who were selling the mortgages to the Fannie and Freddie were not acting irrationally, they made money off of the process. Those who advocate regulation as a solution to the financial crisis should explain why very few of the regulators, and the democratic party, did not predict the bubble before it happened and propose regulations to stop it from happening.

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  5. 5. SoCalSmoove 7:29 pm 05/13/2013

    I’ll give the author the benefit of the doubt that he is not being a sophist here because there is no such thing as a “perfect” free market. I don’t know any libertarians who make such claims. Methinks the author is confusing the idea of a perfectly free market (free of intervention) with the notion of a market that produces perfect outcomes. There is no such thing as a “perfect” free market in part because no single intelligent person, or group of intelligent people could ever devise a “perfect” model that accurately value every individual’s subjective wants and needs.

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  6. 6. Chryses 9:49 pm 05/13/2013

    Ash,

    Yup! You have it pretty close there.

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  7. 7. centromere 6:13 am 05/14/2013

    The same metaphor can be applied to the other ideologies I know of.

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  8. 8. daktari 11:38 am 05/14/2013

    One of the many problems with the libertarian romantic fantasy is that it supposes economic efficiency as not the greatest, but the only good. That it may not achieve even that is a secondary issue. In the libertarian model, humans are just biological addenda to the economic metabolism of The System. Whereas in fact, most of us humans tend to think of the economy as a means to an end, not as an end in itself. In a perfectly free market, human interests are sacrificed to the good of perfecting the economy, and many humans are simply surplus to requirements. Sustaining the lives and wellbeing of economically needless humans interferes with market freedom. It’s a chilling, anti-human vision not a whole lot different from any other kind of ideological enthusiasm, and in the end the refusal of a great many people to just die would result in the need to either repress them – which requires a great deal of planning and effort inimical to market freedom – or an enlightened need to help them along to their quietus.

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  9. 9. Terrell Perry 2:57 pm 05/14/2013

    It has been well established that any argument by analogy is fraud. Ash, your blog may be safely dismissed

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  10. 10. curiouswavefunction 3:05 pm 05/14/2013

    #9: Does that mean you will no longer comment on my blog? Thank you!

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  11. 11. Anataseem 3:21 pm 05/14/2013

    The free market speaks to us every day. An under-ten-dollar t-shirt is worth more than a thousand dead Bangladeshi garment workers.

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  12. 12. Terrell Perry 3:41 pm 05/14/2013

    No Ash, I will comment on your blog when you make logical errors.

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  13. 13. centromere 6:29 pm 05/14/2013

    @8. daktari,

    “One of the many problems with the libertarian romantic fantasy is that it supposes economic efficiency as not the greatest, but the only good”

    Where did you discover that to libertarians, economic efficiency is the only good?

    I’d not read that until I read your post.

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  14. 14. daktari 4:30 pm 05/15/2013

    @ centromere

    We’re working here in the context of an economic argument. Libertarians also believe various resentful things about not having to go to bed at 9pm and not having to eat broccoli as being expressions of freedom, but the economic argument is more or less stated in the article above: a perfectly free market is the most efficient economic system.

    The trouble with this is that it’s built on the premise that economic efficiency is self-evidently The Good and that planning, regulation, taxation, subsidy, bailout, corporate welfare, etc, are all evil because they slow the rate at which society can metabolize energy into lifestyle. The entire basis of this argument is that economic efficiency will make everything better, richer, freer. “Look at the USSR – planning and regulation made everyone poor and miserable, therefore to make everyone rich and happy we must have everyone free to determine what he wants and be able to get it by trading freely, and companies will be strongest and make the most desirable and affordable goods if they are perpetually locked in a fight to the death with one another”.

    And so on. Is any of this ringing any bells? But the trouble with that is that the efficiency of the free market, which is supposed to shower blessings on those who carry on like the heroes of the Ayn Rand romances, is inhibited by any social goal or policy other than achieving the maximum freedom/efficiency of the market. “Freedom” is the only good, and all other perfected outcomes will derive from perfect freedom. Freedom of the market, which will result in optimal efficiency, becomes an end in itself; and if there are people too poor or too stupid or too sick to pull their goodies out of the horn of plenty, well … as Ron Paul rather vaguely assured us, someone will look after them. Or at least they did, when he was a boy. So far as he knows. Public education? Public health? Rational use of public resources? All disqualified. “There is no society” as Thatcher famously said, with the batty conviction of an apparatchik dismissing the existence of starvation in the Ukraine.

    “The good of society” is not interchangeable with “the good of the market” – this is just a fiction that seems reasonable to those who think they will benefit from confusing freedom with keeping-whatever-I-can-get. Ultimately, much of society is inimical to the needs of the market – the weak are a waste, and civilization is an elitist affectation and none of it pertains to looking out for number one – and much of the labor force is surplus to requirements. Indeed much of humanity is surplus to requirements. And this, from a human perspective, is a problem.

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  15. 15. centromere 8:05 am 05/19/2013

    @14. daktari

    “the economic argument is more or less stated in the article above: a perfectly free market is the most efficient economic system. “

    @8, “One of the many problems with the libertarian romantic fantasy is that it supposes economic efficiency as not the greatest, but the only good”

    You may be rewarded if you rethink your position. The most efficient economic system =/= the only good.

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  16. 16. centromere 8:18 am 05/19/2013

    @14. daktari

    “The trouble with this is that it’s built on the premise that economic efficiency is self-evidently The Good and that planning, regulation, taxation, subsidy, bailout, corporate welfare, etc, are all evil because they slow the rate at which society can metabolize energy into lifestyle. “

    Have you considered that there may be other social components to a Libertarian’s “Good Life”, as for example collective defense from enemies within and without the group?

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  17. 17. centromere 8:41 am 05/19/2013

    @14. daktari

    ““The good of society” is not interchangeable with “the good of the market” “

    I agree with you there.

    “this is just a fiction that seems reasonable to those who think they will benefit from confusing freedom with keeping-whatever-I-can-get.”

    I’m unsure that is correct. You my want to review the Libertarian ideals in greater depth; I think you’ve confused them with Randian positions.

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  18. 18. ovidiu69 9:39 am 11/18/2013

    The question if financial markets could be an aspect of quantum world came through my mind one day as I held in one hand a paper in nuclear physics and in the other hand a paper in finance (Quantum Tunneling of Stock Price in Range Bound Market Conditions http://arxiv.org/abs/1307.6727) and surprisingly conclude that the same formula appear in both articles. Phenomena from apparently completely different field of research were solved with the help of same equation. Things are getting even weirder saying that the formula I was talking about is the time-independent Schrodinger equation.
    It seems natural to speak of Schrodinger equation in the context of nuclear physics about α particle decay and radioactivity but in finance is sure an odd choice. The Schrodinger equation applied to range bound markets, tunneling effect for stock price are definitely strange words to appear in a finance article. What possibly can have nucleus and atoms in common with stocks and option valuation? Is just a coincidental fact that problems arising in nuclear physics and financial markets are solved in the same manner or may the stock market be just another facet of nature?
    Is not an isolated case having the merit to make one wonder if finance and economics could be, by some extent, a part of nature just like atoms, planets and stars, subjected to the same physical laws. The Black-Scholes equation, which stays at the foundation of the above so called stock market tunneling effect, is as the authors emphasize the well-known heat equation. Are stock option contracts similar to metals getting heated and cooled progressively? It seems that the answer is yes! It is not a simple coincidence that heat equation applies to financial markets since finance is a part of physical nature.
    Beyond the philosophical meaning of the question in the title, it remains the fact that physical laws are applied with undeniable success to financial and economical phenomena.

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